The world is headed towards a global recession and prolonged stagnation unless we quickly change the current policy course of monetary and fiscal tightening in advanced economies.
Supply-side shocks, waning consumer and investor confidence and the war in Ukraine have provoked a global slowdown and triggered inflationary pressures.
All regions will be affected, but alarm bells are ringing most for developing countries, many of which are edging closer to debt default. Climate stress is intensifying, with mounting loss and damage in vulnerable countries who lack the fiscal space to deal with disasters, let alone invest in their own long-term development.
UNCTAD projects that world economic growth will slow to 2.5% in 2022 and drop to 2.2% in 2023. The global slowdown would leave real GDP still below its pre-pandemic trend, costing the world more than $17 trillion – close to 20% of the world’s income.
Despite this, leading central banks are raising interest rates sharply, threatening to cut off growth altogether and making life much harder for heavily indebted firms, households and governments.
The global slowdown will affect all economies. But developing countries are exposed most to the cascade of debt, health and climate crises. Middle-income countries in Latin America and low-income countries in Africa could suffer some of the sharpest slowdowns this year.
The average growth rate for developing economies is projected to drop below 3% – a pace that is insufficient for sustainable development and will further squeeze public and private finances and damage employment prospects.
With 60% of low-income countries and 30% of emerging market economies in or near debt distress, the possibility of a global debt crisis is high.
Countries that were showing signs of debt distress before the pandemic – including Sri Lanka, Suriname and Zambia – are being hit especially hard by the global slowdown. And climate shocks are heightening the risk of economic instability in indebted developing countries.
The situation in developing countries is worse than recognized by the Group of 20 major economies (G20) and other international financial fora. Developing countries have already spent an estimated $379 billion of reserves to defend their currencies this year, almost double the amount of new Special Drawing Rights recently allocated to them by the International Monetary Fund (IMF).
Interest rate hikes by advanced economies are hitting the most vulnerable hardest. Some 90 developing countries have seen their currencies weaken against the dollar this year – over a third of them by more than 10%.
The prices of necessities like food and energy have soared in the wake of the war in Ukraine. And a stronger dollar makes the situation worse, raising the price of imports in developing countries. The consequences are devastating for the poor across the globe, especially in a time of stagnant wages for most workers.
This year’s interest rate hikes in the United States, for example, could cut $360 billion of future income for developing countries (excluding China).
Prices of commodities – particularly food and energy – climbed for much of the last two years, posing significant challenges for households everywhere. Added upward pressure on fertilizer prices means the damage could be lasting since it’s the top input cost for many small farmers around the world.
Although the war in Ukraine has contributed to this situation, commodity markets have been in a turbulent state for a decade.
The Black Sea Grain Initiative led by the United Nations has had a significant impact in lowering global food prices. However, insufficient attention has been paid to the role of speculators and betting frenzies in futures contracts, commodity swaps and exchange traded funds.
Also, large multinational corporations with considerable market power appear to have taken undue advantage of the current context to raise markups to boost profits on the backs of some of the world’s poorest people.